The United States Federal Reserve (Fed) has raised interest rates by a quarter of a point to a range between 2,25% and 2,5%, which is at levels not seen in more than a decade in the world's leading economic power. This is the last of the four increases that the agency had planned to carry out in 2018, although it has suggested that the pace in 2019 will be more moderate. With the forecast that there are two and not four increases that can be developed during this period.
This news has had a very negative impact on equity markets, with widespread declines in all stock indices in the world. With an intensity not seen in recent months, with falls between 2% and 3% and where the reference index of the Spanish stock market, the Ibex 35, has led him to test the level of the 8.600 points. One of the most important supports that it has at the moment and that can induce, if in the end it is demolished, that the downtrend is permanently installed in the Spanish square.
This reaction of the financial markets proves the importance of interest rates on the world's stock markets. With very intense reactions, in one sense or another, which will depend on the evolution of this important economic parameter. To the point that small and medium investors consider how the evolution of interest rates actually affects economic activity and, very fundamentally, relationships with the always complicated world of money and investment.
High interest rates
If we apply the decision by the Federal Reserve of the United States to raise, even gradually, interest rates, it is useful to know where users in general may be affected. Well, an increase in this economic parameter implies above all a more effective price control of the products and goods that are acquired. In other words, inflation usually tends to decrease in these scenarios and therefore there is greater control over prices. The most immediate effect is that the cost of life will not occur with the same intensity.
On the other hand, this aspect encourages consumption among users to be higher and benefits the economic growth of a country above other technical considerations. Therefore, this would be one of the most positive factors of the performance in the rise in interest rates. Because it is after all one of the objectives of the international governments when developing your economic policy. As has been demonstrated in recent years and especially after the development of the last economic crisis, between 2007 and 2009.
More expensive loans
On the contrary, one of the most feared effects of the rise in interest rates is that the financing lines they get more expensive, both between individuals and companies. Not in vain, it will be necessary to dedicate a greater economic effort in its amortization and always depending on the intensity of these increases. It can be from a few tenths to several percentage points in the interest that credit institutions apply to their clients. With which it affects that the monetary mass that is in circulation is smaller and in this sense it can affect very seriously the good development of the consumption.
This in practice means that when there is a rise in interest rates, banks quickly review their contracting conditions. Raising the interest rates of their products and in some cases also in the commissions and other expenses in its management or maintenance. From this point of view, this monetary action is not very favorable for the real interests of consumers who will see how they will have to dedicate more monetary resources in the formalization of any line of credit.
Impact on financial markets
To a greater or lesser extent, these monetary actions will have an impact on equity markets around the world. And of course it is not positive, as it has been possible to verify these days after the new rate hike by the Federal Reserve of the United States. Because the bags receive this measure with wide decreases in the prices of securities that are listed on the financial markets. With an intensity that is sometimes very pronounced and may also be exaggerated. But this is the law that prevails among investors around the world.
While on the contrary, a rise in interest rates is received in a different way by the fixed income markets, which are the great beneficiaries of this measure. In any case, you will have to be very attentive to all these kinds of movements in order to review our investment portfolio or securities. And if it is necessary to vary it based on these changes in the governments' monetary policy. Because it cannot be forgotten that strong imbalances can occur in them. As it will have happened to you on more than one occasion with your own investments.
Savings benefit
Therefore, one of the great beneficiaries of the measure of raising interest rates will undoubtedly be savers. For a very simple reason to explain and that is based on the fact that all products destined for savings increase in the performance they offer to their holders. As for example, in fixed-term bank deposits, corporate promissory notes or even in high-yield or more conventional accounts. Its most immediate effect, which is your interest, will rise very quickly in proportion to the increases experienced.
This will help individuals to have more liquidity in their savings account and has a beneficial impact on the enhancement of consumption above other technical considerations. Term deposits can rise perfectly in this scenario of applying an average and annual interest from 1% to 1,50% or in very similar proportions. Therefore, money moves towards fixed income to the detriment of equities. There is therefore a transfer of monetary flow between both financial assets that is very interesting to study and analyze in other more specific articles on this trend in the world of money.
Forex Strengthening
Another of the most positive effects of the rise in interest rates is that it generates an enhancement of the affected currency. In this sense, it cannot be forgotten that after the decision of the United States Federal Reserve to raise its interest rates, there was an immediate strengthening of its currency. That is, and so that you understand it better from now on, the dollar will increase its price. This will affect your ability to export, as buying US goods will be more expensive from now on.
On the other hand, it is very convenient to review an aspect that this important monetary measure implies and is that related to the operations carried out in the foreign exchange markets. Since depending on its application, the savings can be made profitable depending on the currencies that are enhanced with this new monetary status. It is a very original strategy that small and medium investors with more experience in this kind of special operations have been developing. Not surprisingly, they offer a very high profitability compared to other financial assets of special relevance.
Interest rate in the euro zone
As regards the the euro area the situation for the moment is substantially different from the American one. This is because the economic situation is different and in this sense the analysis department points out that “in any case, they remain at high levels, which allow confidence in the continuity of the expansive cycle. Our growth forecast for 2018 is now +2,0% compared to +2,1% previously, and +1,8% in 2019 compared to 1,9% previously ”.
On the other hand, they consider that “we do not expect the ECB to change its roadmap. The asset purchase (15.000 million euros / month) will come to an end in December. Despite the end of QE, monetary policy will continue to be accommodative, through the reinvestment of maturities and forward guidance on interest rates ”. Not surprisingly, they offer a very high profitability compared to other financial assets of special relevance.
In other words, it is a scenario that still has a long way to go since they think that “interest rates, we think that the first rise could be in September / October in the deposit rate, from the current -0,4%. Draghi ends his term in October and thus paves the way for standardization in rates ”. Something that will undoubtedly affect a large part of the small and medium investors who will be very aware of what may happen in community policy in order to develop some kind of strategies to improve their investments.